Commodity Trading Strategies

Learn the most excellent game plan in trading commodities.

Congruent with any other investment decisions, a careful and strategic plan must be created prior to the action. The same thing goes with trading, whichever asset you may choose. In commodity trading, one should have a consistent and attainable plan which will be followed along with the process. The main concern in trading is to win at the exact and appropriate momentum. This can only be achieved with the help of a well-planned strategy.

The commodity market can be considered as one of the most influential factors in the economic condition of a nation. The commodities are mostly volatile and do not usually move in the same direction. There are types of commodities which perform well when the economy is steady, thus, there are those which are bearish when the economy struggles. Also trading commodities is not only about the weather, the season and the stockpiles data. It’s more than that, that’s why there’s a need for a scheme for the trading success over the course of time.

Commodities such as the precious and industrial metals, energy, livestock and meat, and agricultural are the most traded ones. Precious metals include the gold, silver, copper and platinum while the energy sector comprises with crude oil and natural gas. Some of the traded agricultural products are corn, rice, wheat and cotton while live cattle under the livestock and meat category. That’s how wide the choices are.

Types of Commodity Trading Schemes

Fundamental Approach

Trading commodities using the fundamentals involves the understanding of supply and demand. The law of supply states that an increase in price results in an increase in quantity supplied, whereas the law of demand means that as the price of increases the demand will eventually decrease. The perfect example would be the case of oil futures. Currently, the oil market is flooded as the major oil kingpins produce more than what the consumer needs. This global glut supply has led to the fluctuation of oil prices.

Apart from the supply and demand, there are specific factors to be considered in trading commodities. For instance, the weather plays a vital role in the price outlook of wheat, rice and corn. The currency and inflation also affect the flow of export and import in a nation which produces and /or consumes commodities. Moreover, the importance of the inventory and stocks data of a commodity was explained in the article Wheat Surges as Traders Builds Inventory. (Check out more news about the commodities at fsmnews.com)

In general, trading using the fundamentals requires a conscious effort to examine the factors which affect the commodities. Not only that, the identification of the buy and sell momentum takes time to decipher. The market events can easily change the path of the stocks and the commodities, thus, it calls for patience to understand the price movement based on fundamentals. However, experienced traders who memorize the use of fundamental strategies often can take advantage of any market fluctuations or volatility.

Finding Breakouts

Another effective approach in trading commodities is the use of trading breakouts. In the anatomy of trading, breakouts are defined as the exact moment where the stock price moves outside the labeled support or resistance level with increased volume. Commodity traders who utilize this method enter a long position (buy) after the price breaks above resistance and if the price breaks below the support level, they will likely enter a short position (sell).

Since commodities are usually unsteady, they are prone to fluctuations within a trading session. As seen in the hourly XAU/USD chart, the yellow metal opened 1212.44, hit 1214.75 and settled at 1211.60 during the mid-session. The rationale here is very simple – a trading session comes with highs and lows, therefore, take advantage of a long lasting trend. Traders critically spot these highs and lows and anticipate the point where the momentum will likely sustain.

Nevertheless, there are also risks in using this strategy. For one, some commodities just take so long to establish a firm trend. In times of global glut supply and soaring dollar, the price of oil ticks up and down, making it hard to pinpoint the real breakout. This strategy is also may also lead to false breakouts, whereas the price moves above the established range, but then it retreats back. To avoid these drawbacks, traders support may use other trading strategies. (Click this link to see more Trading Strategies FSM News.)

The main purpose of using commodity trading strategies is to gain profit through the price movements. Learn how to incorporate Range Trading Strategy, Relative Strength Index and Momentum Indicators in the next article. Stay informed here at FSM News.

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